Crypto investors are walking a tightrope this year that is set to stretch to the longest bear cycle in crypto history. This fear may seem worn out for crypto veterans, but have we entered completely new territory this year?
First, let’s set the right point of reference by going back to past bear cycles manifested by bitcoin price declines.
Bitcoin’s bear road investigated
At 13 years and 8 months, Bitcoin is now entering puberty. By February 2017, Bitcoin held a 95% dominance of the total cryptocurrency market cap, which has fallen to 40% since September 2022. In other words, for 62% of the crypto market’s entire existence, Bitcoin has completely dominated the scene.
This may change as Ethereum completes its transition from proof-of-work to proof-of-stake. But even with a dominance of less than half, Bitcoin is still the dominant cryptocurrency. At the same time, the entire crypto market moves with Bitcoin.
For this reason, it is important to see how long previous bear cycles have lasted. Keep in mind that the asset must fall by at least -20% followed by very negative market sentiment to constitute a “bear market” in the traditional sense.
- In June 2011, Bitcoin experienced its first bear turbulence, crashing from $32 to $2.
Duration: 163 days with a -93% drop.
- In November 2013, Bitcoin crashed for the second time just as it surpassed the $1,000 milestone for the first time, falling to $230. Duration: 410 days with a -86% drop.
- After recovering from the second bear cycle in January 2017, Bitcoin reached all the way to $20,000 but crashed at $3.2,000 in December 2018. Duration: 411 days with a -82% drop.
- After regaining the previous milestone of $20,000, Bitcoin reached $63,000 in April 2021. Shortly after, it continued its three-month decline to $29,000. Duration: 90 days with a -54% drop.
- Bitcoin hit ATH at $68.7k in November 2021 and fell below $20k multiple times in 2022 for the first time since November 2020. Duration: Ongoing, but so far over 309 days at -72% decline.
Although there were monthly/weekly rallies, they were short-lived. They were spurred on by either institutional adoption milestones or crypto whale shopping sprees. Typically, bear markets in the traditional stock market last 289 days.
However, not only does the crypto market exist for a fraction of the timeline of the traditional stock market, it also deals with novel digital assets. For this reason, the forecast for the end of the fifth bear market should take into account its main drivers.
What is Driving the Current Crypto Bear Market?
Luckily, it is exceedingly transparent as to why the total crypto market cap has shrunk by -53% in 2022. It’s all about the Federal Reserve’s liquidity pool management. Since the pandemic-induced economic slowdown that began in March 2020, the Fed has stimulated the economy with $5 trillion, the largest stimulus surge in dollar history.
As this liquidity glut found its way into cryptocurrencies, DeFi, and NFTs, the uglier side began to rear its ugly head – inflation. The Fed’s stated dual objective is to keep both inflation and unemployment low. After the consumer price index (CPI) rose to 8.5% in March, the Fed used its interest rate tool to make borrowing more expensive.
In March, the meager Fed hike was just 25 basis points. But with hints of a doubling from April to May, both stocks and cryptocurrencies went into a downward spiral. Add two more 75bps hikes in June and July and the crypto market kept collapsing, a support level at the time.
Here is a valuable lesson to be learned about the nature of digital assets, particularly Bitcoin. People may talk as if bitcoin did one thing or the other and reify it as an entity. Ultimately, however, Bitcoin is nothing more than a platform for human input.
And people’s reactions are consistent with the biggest moves, the more capitalized stock market. In turn, the stock market is in an addictive relationship with the Fed for its supply of cheap credit. Furthermore, bitcoin is not a hedge against inflation as such, but against dollar demand.
When the Fed started turning its dollar liquidity tap, it made the dollar more valuable because other countries depend on it. Therefore, other countries have to buy more dollars against their depreciating national currencies. This was illustrated by Sri Lanka’s collapse as it ran out of foreign USD reserves.
Moreover, after Europe imposed sanctions on Russia, it plunged itself into a severe energy crisis and plunged the euro below the dollar for the first time in twenty years. Accordingly, bitcoin exchange flows have fallen to multi-year lows.
Consequently, although the supply of dollars has increased and fueled inflation, its international demand is relentless. It is now clear that as the crypto market forerunner, Bitcoin is ill-equipped to deal with a strengthening dollar despite inflation – or is it?
Room for optimism in emerging markets
It may seem that the crypto market is at the mercy of the Federal Reserve, particularly how the central bank’s actions are affecting the stock market and the dollar. It may appear that the Fed has already reset the crypto market. However, based on Chainalysis’ latest report on global crypto adoption in 154 countries, the Grassroots Adoption Index is still above the summer 2020 bull market.
The data also suggests that many large investors have not realized their losses. This prevents the crypto market from collapsing further. On the fiat inflation front, the news is even better. The most likely investors to buy cryptocurrencies are from countries hit by the dollar’s strength.
However, in order for the next wave of crypto investors to pull the market out of the bear’s clutches, a lot of work needs to be done in the education department. On average, Gemini survey respondents rely twice as much on educational resources as they do on a friend’s recommendation.
The most common concerns are security of custody, use/purchase with cryptos, trust and lack of government support. Such concerns can be resolved through education. Concerns about volatility also resolve themselves as acceptance increases.
In addition to education, over a third of Gemini’s crypto-curious respondents (not yet owning but willing) have stated that regulation is a major concern. These include tax treatment and the categorization of digital assets as commodities or securities.
The Securities and Exchange Commission has taken advantage of the regulatory gap in the US and instituted a policy of “regulation by enforcement”. Meanwhile, SEC Chairman Gary Gensler has repeatedly suggested that only Bitcoin and Ethereum should be considered commodities, which would then be under less onerous CFTC oversight.
“Of the almost 10,000 tokens in the crypto market, I think the vast majority are securities. Offerings and sales of these thousands of crypto security tokens fall under securities laws.”
Gary Gensler at the Practicing Law Institute’s SEC Speaks conference
Likewise, the collapse of Terra (LUNA) could give lawmakers the ammunition needed to enact strict regulations on digital assets. This likely comes from the FATF guidelines recommending that all crypto transactions be traceable and reportable. Specifically, from non-custodial wallets to centralized exchanges.
Whether these measures are positive or negative, regulatory clarity itself would remove a major impediment to crypto adoption globally. As an added bonus, it would remove the “lack of government support” from the concert table. Given President Biden’s March executive order on the “responsible development” of digital assets, 2023 looks set to be the pivotal year for crypto regulation.
When regulatory clarity emerges, the conditions are already in place for widespread institutional adoption. BlackRock, the world’s largest wealth manager with $9.4 trillion in assets, has chosen Coinbase as its crypto gateway for potentially hundreds of ETFs. We already know that Bitcoin ETFs are growing in popularity because they leave custody in institutional hands.
Play to Earn (P2E) gaming and NFTs
P2E gaming and NFTs go hand in hand. In fact, blockchain gaming could be the biggest driver of digital assets of all. According to the Chainalysis report, Vietnam ranks first among grassroots crypto adoption.
This is no coincidence. Vietnam, specifically Ho Chi Minh City, is home to Sky Mavis, the team behind Axie Infinity. This tactical NFT-based game broke all sales records and set the stage for other blockchain players to come. In Vietnam alone, it has made the country a hub for crypto startups. Many areas of the Philippines have also seen similar blockchain gaming adoption.
This trend is consistent with investments in Q2 2022, where crypto games accounted for 59% of all VC-funded projects. In August, Meta, the king of all things social, integrated its Instagram NFT feature in 100 countries. If there were a better setup for a digital asset infrastructure, it would be difficult to find a better one.
Speaking of infrastructure, Ethereum is another one leading the entire DeFi/NFT ecosystem. Although Ethereum will remain slow post-Merge to Surge, it has its Layer 2 scalability solution – Polygon. The sidechain has already attracted an impressive array of business partners: DraftKings, YugaLabs, Disney, Stripe, Reddit, Meta, and Starbucks.
Zoom out for a better crypto view
The Fed can function as the central bank of the world. Its tools flood or drain economies with liquidity, affecting the cost of living and the cost of doing business. However, this is only signal information. The real world assets are in place to start churn all over again.
In the crypto world, these assets include unabated VC-backed projects, enterprise blockchain integration, and the merger of Web2 and Web3 platforms (Twitter, Reddit, Meta, etc.). Even regulation that is perceived negatively is likely to turn into a positive one as it clears the fog of uncertainty.
For these reasons, we come full circle with Warren Buffett’s investing axiom, “fear when others are greedy, and greedy when others are fearful.”